The Strategic Case for Holding to Maturity in Canadian Fixed Income: Lessons from Guardian Capital's GuardBonds™ Funds

In a rising interest rate environment, traditional bond funds face inherent challenges: bond prices fall as yields rise, creating portfolio volatility and capital erosion. Canadian investors seeking stability and income must rethink conventional fixed-income strategies. Guardian Capital’s GuardBonds™ Funds, a suite of defined-maturity bond ETFs, offer a compelling alternative by combining active management with a structural commitment to holding bonds until maturity. This approach prioritizes capital preservation while optimizing yield—a critical advantage in today’s market dynamics.

The Vulnerability of Traditional Bond Funds

Conventional bond funds are designed to provide liquidity and diversification but are structurally ill-suited to rising rate environments. When interest rates climb, the market value of existing bonds in these portfolios declines, leading to short-term capital losses for investors [1]. For example, during the 2022–2024 rate-hiking cycle, many Canadian bond funds saw significant outflows as investors grappled with negative returns. The lack of a maturity date exacerbates this risk, as funds must sell bonds before maturity to meet redemption demands, locking in losses [2].

GuardBonds™: A Structural Solution

Guardian Capital’s GuardBonds™ Funds address these vulnerabilities through a dual strategy of holding bonds to maturity and active, tax-efficient management. By purchasing investment-grade bonds at a discount and holding them until maturity, the funds aim to capture capital gains while avoiding the price volatility of secondary markets [1]. This structure ensures that investors receive the full principal at maturity, regardless of broader interest rate movements.

For instance, the GuardBonds™ 2025 Investment Grade Bond Fund (GBFB) is explicitly designed to return capital in 2025, providing certainty in an uncertain environment [3]. Similarly, the newly launched GuardBonds™ 2028 (GBFE) and 2029 (GBFF) funds extend this strategy to longer horizons, allowing investors to ladder their fixed-income exposure across multiple maturity dates [3]. This laddering effect reduces reinvestment risk while maintaining a steady income stream.

Tactical Yield Optimization and Risk Mitigation

Beyond structural advantages, GuardBonds™ employ active management to enhance yield and preserve capital. Guardian Capital’s Fixed Income team tactically shifts exposures to high-yield credit securities and uses derivatives to hedge against systemic risks such as interest rate volatility and currency fluctuations [2]. For example, during periods of market deterioration, the strategy adopts a defensive stance, prioritizing capital preservation over yield. Conversely, in recovery phases, it increases risk to capture income and capital gains [2].

This flexibility is particularly valuable in a rising rate environment. By dynamically adjusting credit exposure and leveraging derivatives, GuardBonds™ aim to outperform traditional bond funds that lack such agility. The Guardian Strategic Income Fund, another offering from Guardian Capital, further exemplifies this approach by using derivatives for hedging and tactically managing high-yield credit exposure based on the credit cycle [2].

A Bridge Between Active Management and Direct Ownership

GuardBonds™ Funds also bridge the gap between active management and direct bond ownership. Unlike non-redeemable GICs, which lack liquidity, GuardBonds™ offer daily liquidity while retaining the benefits of a maturity-driven strategy [1]. Investors can access gains earned to date without sacrificing the principal return at maturity. This hybrid model appeals to investors seeking both income stability and flexibility in a rising rate environment.

Conclusion: Strategic Implications for Canadian Investors

As interest rates remain elevated, the structural and tactical advantages of GuardBonds™ make them a strategic choice for capital preservation and yield optimization. By holding bonds to maturity, actively managing credit exposure, and leveraging derivatives, these funds mitigate the risks inherent in traditional fixed-income strategies. For Canadian investors navigating a challenging rate environment, GuardBonds™ represent a forward-thinking solution that aligns with long-term financial goals.

Source:
[1] Ahead of the Curve: Monthly Bond Market Recap and ... [https://www.guardiancapital.com/investmentsolutions/insights/ahead-of-the-curve-may-2024/]
[2] Guardian Strategic Income Fund [https://www.guardiancapital.com/investmentsolutions/strategic-income-fund/]
[3] Canada's ETF Scene Surges With Bold New Themes ... [https://www.theglobeandmail.com/investing/markets/stocks/EKAR/pressreleases/32891183/canadas-etf-scene-surges-with-bold-new-themes-and-income-focused-launches/]